Eurozone recovery accelerates

By JUERGEN BAETZ - The Associated Press

Feb. 14, 2014

Michael Probst

Caption

The new headquarters of the European Central Bank (ECB), building at right, is under construction on the water front of the River Main, in Frankfurt, Germany, Friday, Feb. 14, 2014. The ECB is supposed to move into this new building at the end of 2014. The fourth quarter financial growth for 2013 outperformed analysts' expectations and eased some of the pressure on the European Central Bank to loosen its monetary policy. (AP Photo/Michael Probst)

BRUSSELS – Europe’s economy is growing faster, raising hopes for a sustainable recovery, but that may not be enough to bring sky-high levels of unemployment down anytime soon.

The economy of the euro bloc grew 0.3 percent in the October-December period from the previous quarter, the Eurostat statistics office said Friday. That was slightly more than expected and up from the third quarter’s 0.1 percent.

The recovery remains tepid, however, at least by global standards. The eurozone’s annualized rate of about 1.2 percent is less than half the U.S.’s 3.2 percent rate during the same period.

“While still far from dynamic, it is a step back in the right direction,” said analyst Howard Archer of IHS Global Insight.

The eurozone is central to the global economy as Europeans are big buyers of goods from the United States and Asia. Uncertainty over the bloc’s future in recent years weighed on growth and corporate earnings around the world.

Here’s a look at the eurozone economy’s vital signs:

— NOT ENOUGH TO CREATE JOBS

One of the biggest economic problems facing Europe is unemployment, particularly among the young in those countries at the forefront of the region’s debt crisis.

The eurozone economy emerged from recession last year as its financial crisis eased, but employers haven’t started hiring much. The unemployment rate has remained around 12 percent since late 2012.

As well as creating uncertainty in households and stifling consumer spending, unemployment is a burden to a country’s coffers as the government pays benefits and misses out on tax revenue from payrolls and economic activity.

That pain is not shared evenly across the eurozone, however.

While unemployment in Germany is near record lows around 5 percent, it has jumped to massive levels in countries struggling with debt. In Greece, it has reached a staggering 28 percent, and about 25 percent in Spain. The situation among the young is even worse — in Greece, almost 60 percent of those under 25 were out of work.

“Even if the fourth quarter’s slightly faster rate of growth is sustained, it will be many years before the record number of eurozone unemployed can be put back to work,” said Bill Adams, an analyst with PNC.

The unemployment rate in the U.S., by comparison, has fallen steadily to a five-year low of 6.6 percent as of January.

— MORE COUNTRIES PICKING UP

The good news in Friday’s growth figures is that they show improvements across most economies.

Growth was unexpectedly strong in the bloc’s major economies like Germany, France, Italy — which saw its first growth since 2011 — and the Netherlands.

But even Spain and Portugal — which needed rescue loans to rescue banks and the government, respectively — are showing signs of life.

“The eurozone’s recovery has moved up a gear,” said Chris Williamson, an analyst with Markit.

— NOT ALL SECTORS CONTRIBUTING

While Friday’s report did not break down growth by sector, recent indicators show exports continue to be key for the bloc. That’s particularly true for Germany, traditionally a big trader of high-value goods like cars and machinery.

Consumer spending, on the other hand, has been disappointing across the eurozone, particularly over the recent holiday months, as has industrial production.

On the plus side, forward-looking surveys show business confidence is rising and companies are ready to invest more.

— MEAGER OUTLOOK

The recovery is expected to remain modest this year.

The European Commission, the EU’s executive arm, predicts growth of 1.1 percent for the eurozone and 1.4 percent for the broader 28-country EU, which includes nations like Britain and Poland that don’t use the euro.

Most analysts forecast growth of around 1 percent for the eurozone: Probably not enough to lift many out of unemployment, but it would still be the bloc’s best performance since 2011.

That would still pale in comparison to the U.S. economy, which some expect to grow 3 percent this year, its strongest performance since 2005.

— DEFLATION THREAT LURKS

The weak recovery has created one big headache, a steady slide in the inflation rate.

Policymakers are worried that if prices start falling outright, consumers and businesses might put off spending, killing off growth. Once it starts, deflation can be terribly difficult to get rid of — Japan struggled with it for two decades, during which its economy hardly grew at all.

Since unemployment remains high, domestic demand in many countries is unlikely to pick up soon, which encourages retailers to lower prices further to boost sales.

Inflation across the eurozone is 0.7 percent, well below the European Central Bank’s target of just under 2 percent. So the central bank may act again in coming months.

Some analysts think it might cut its benchmark interest rate from its record low of 0.25 percent, offer more cheap loans to banks or pump money into the economy.

Capital Economist analyst Jonathan Loynes said the fourth-quarter growth uptick isn’t enough to “to head off the dangers of deflation.”